Should Investors “Buy the Dip” in AMZN Stock?

10.26.19

This year, Amazon.com (AMZN) had some good news for customers: one-day shipping is now standard for Amazon Prime orders. But in Thursday’s quarterly report, this translated into bad news for investors. The effort contributed to a spectacular earnings miss:

Last year, Amazon earned $5.75 per share in the third quarter. Analysts were expecting less this time around: $4.59 per share – its first earnings decline since June 2017. But, in reality, Amazon didn’t even reach that target. Earnings rang in at $4.23 per share, or $2.1 billion in total.

Revenues of $70 billion did beat expectations. But between the profit impact of larger-than-expected spending on one-day shipping (over $1 billion!), plus Amazon’s disappointing forecast for the holiday season, in the end AMZN sold off pretty sharply on the news.

Now, even before this, AMZN was well off its 52-week high. I know this must be impacting a lot of folks, given how broadly AMZN is owned by individual investors and fund managers alike.

And others may be tempted to “buy the dip” now. After all, AMZN’s price-to-earnings ratio is near its lowest levels since 2015, when Amazon became consistently profitable.

At Growth Investor, we went ahead and sold our AMZN position in September. You see, I was continuing to see red flags even BEFORE the earnings event. This latest report is just one part of some very worrying trends for AMZN lately.

Red Flag #1 for AMZN Stock: Earnings Momentum

If you’d have run Amazon through my Portfolio Grader tool, you’d have seen that it actually rated highly on Sales Growth, where it earned a “B,” and not too badly on Earnings Growth either, where it earned a “C.”

But Earnings Momentum is another story.

It’s not enough to see a company’s earnings grow – I also want to see it growing rapidly. I’m a car guy, so let’s look at it this way: Just about any car can make it to 60 miles per hour, theoretically. But not as many can make it to 60mph smoothly…let alone as quickly as a Porsche or a Ferrari.

Sadly, when it comes to its “acceleration” – its Earnings Momentum – AMZN is a clunker. It earned an “F” there. And that was even before earnings actually turned lower in this latest quarterly report!

Red Flag #2 for AMZN Stock: Analyst Expectations

Now, again, analysts were expecting earnings to decline. But, either way, you always want to see these earnings estimates improve over time. At Growth Investor, this usually tips us off to a stock that’s about to beat earnings expectations.

And prior to Thursday’s earnings release, AMZN already rated a “D” for its Analyst Earnings Revisions. Or, as Zacks Research puts it, the average earnings expectation dropped 1.66% from mid-September to mid-October.
So, from my experience, AMZN was headed for a big earnings miss.

And not only were analysts lowering their third-quarter earnings estimates for Amazon…the company already had a poor history of meeting expectations.

Red Flag #3 for AMZN Stock: History of Earnings Misses

Naturally, I like to see stocks beat their earnings estimates in the past. If this Earnings Surprises trend is positive, it tells me that Wall Street either isn’t paying attention or doesn’t “get it.” And that’s attractive when looking for stocks to buy now because it means that when the “smart money” does get it, it’ll start pouring into the shares and propel them higher.

Unfortunately, on the factor of Earnings Surprises, AMZN rated a “D” prior to Thursday’s earnings report. If Thursday’s miss was a one-time event, that’d be one thing. But, in fact, it’s part of a worrisome trend.

If a stock is enjoying a nice influx of cash over time, that gives it enough room to run even higher. If the smart money on Wall Street is flowing OUT of the stock, well, the opposite is true.

In fact, my 30+ years of research indicate that this is the single biggest factor in the success or failure of a stock, long-term.

So, a key component of my Growth Investor analysis is my proprietary formula for gauging money flow; I call it the Quantitative Grade.

From time to time, we do see a stock with middling to poor fundamentals but a strong Quantitative Grade. Sad to say, though, that is not the case for AMZN at this juncture. It rated a “D” for its Quant Grade even before Friday’s earnings sell-off.

Why Is Amazon Stock Out of Favor?

With such a poor Quant Grade, it’s fair to say that Wall Street viewed this quarter’s earnings report as a liability. No one likes to see downward analyst revisions, much less a history of missing those targets.

But, in my opinion, there’s another factor at work here:

If you think what happened in the stock market the last few months is wild, just look at the bond market. We’ve got falling and even negative yields overseas. But as investors retreat to U.S. Treasuries it’s causing bizarre effects here, too. Just look at what happened this summer, when the two-year Treasury actually began to yield MORE than the 10-year Treasury. And even the 30-year Treasury can’t be relied upon for good yield anymore.

So if a stock’s earnings picture is uncertain, not only is it going to be volatile, but people are going to look elsewhere seeking income. Remember, AMZN has yet to pay a dividend.

Meanwhile, other stocks not only earn an “A” in my Portfolio Grader, thanks to strong buying pressure and great fundamentals …

The stocks also earn an “A” in my Dividend Grader. These stocks are able to pay great yields – and have the strong business model to back it up.

All in all, I’ve got 28 strong dividend growth stocks for you now in Growth Investor – averaging 4.2% yields – far more than the S&P 500 or even a Treasury bond. These stocks are poised to do well as we continue to see international capital flow to the U.S. markets. Click here to see how I found these stocks, and how you can get great performance out of YOUR portfolio – come what may.

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